HOUSTON -- Three years after its disastrous oil rig accident in the Gulf of Mexico, BP has managed to strengthen its finances by divesting itself of less profitable operations, ramping up new oil production in the North Sea and Angola and reducing its exposure to volatile investments in Russia.
But one wild card continues to menace the company: BP's bill to compensate thousands of Gulf spill claimants is spiraling beyond what it expected and could take billions of dollars out of its future earnings.
In an effort to limit its exposure, BP has told a federal appeals court that a claims administrator misinterpreted the terms of a multibillion-dollar settlement reached last year arising out of the 2010 Deepwater Horizon rig explosion and oil spill that took 11 lives and soiled Gulf beaches. A decision by the 5th U.S. Circuit Court of Appeals in New Orleans is expected within the next few weeks.
According to BP, many businesses are securing settlements for exaggerated or even fictitious losses.
"Irreparable injustices are taking place," Theodore B. Olson, the former solicitor general, who is representing BP, told the appeals court Monday.
He warned of a "hemorrhaging of possibly billions of dollars" because of the administrator's miscalculation of business losses following the spill.
The plaintiffs' lawyers dispute the claim, saying that BP is trying to back away from a settlement it negotiated, co-wrote and agreed to.
BP has taken a charge of $42.2 billion for cleanup costs, fines and other compensation. It initially estimated that it would pay $7.8 billion to Gulf Coast businesses and residents, a total it has increased to $8.2 billion excluding future business loss claims that the company says it cannot yet estimate.
There is no cap to the settlements. The claims continue to rise while awards have been significantly higher than the company had expected. The administrator can accept new claims until next April. Nearly $4 billion has been paid out so far on more than 44,000 eligible claims.
Estimates of how much BP might have to pay out to businesses ranges widely, but it could easily top the $1.7 billion the company still has in a reserve by hundreds of millions if not billions of dollars.
At the same time, BP faces another significant potential liability. Billions of dollars in fines under the Clean Water Act still hang in the balance in Judge Carl Barbier's New Orleans federal courtroom, depending on whether he decides BP, along with its contractors Halliburton and Transocean, engaged in gross negligence or willful misconduct before the calamitous rig explosion. The second phase of the civil trial, starting in September, will determine how much oil actually spilled.
If BP is found to be grossly negligent and receives a maximum fine under the federal Clean Water Act, the company could face as much as $14 billion in penalties depending on how much oil flooded into the Gulf and how much blame is apportioned to BP and the contractors, according to Stephen Simko, a senior Morningstar analyst.
BP last year agreed to plead guilty to 14 criminal counts and will pay $4 billion over five years in a settlement with the Justice Department. Two company well-site supervisors who were aboard the Deepwater Horizon and a former vice president of exploration in the Gulf also face trials on an assortment of criminal charges.
But oil company analysts are optimistic that a company that appeared to be in mortal danger in the months after the accident can now bear the financial burdens unless oil prices fall considerably -- albeit as a company that is much reduced in size from the one before the accident.
"It will cost them more money but BP can afford it," said Fadel Gheit, managing director of oil and gas research at Oppenheimer & Co. "Even with this accident, BP remains the world leader in deepwater drilling. They have an offshore India gas position that could significantly boost its market value over the years, and before you know it the company will be one of the foremost explorers in the Arctic."
BP has proved to be a formidable moneymaking machine capable of weathering the storm. Between 2010 and 2012, BP conducted something of a garage sale of oil and gas fields that its leaders considered superfluous, pulling in about $38 billion, only a few billion dollars short of what it has estimated that it will pay out in Gulf spill damages.
As of last March the company had about $28 billion in cash, and it has resumed paying dividends.
BP is a smaller company now with a lower market capitalization and reduced production, but it is also a simpler one. Its chief executive, Robert W. Dudley, is betting that might help make it more profitable and safer. BP officers say the company is now drilling with much more caution, willing to sacrifice production and revenue for safety but still trying to find the right balance.
"This has not only been about unlocking cash," Dudley told analysts in December, "but about focusing the portfolio and greatly reducing operational complexity."
Dudley sold half the fields BP operated in the Gulf of Mexico and a third of those in the North Sea, a stronghold since the 1970s. Those remain crucial areas, however, and the company has moved more rigs into the Gulf in recent months to increase exploration and production. The company is also investing more heavily in Alaska.
Dudley rid the company of a perennial source of friction and uncertainty when he sold BP's lucrative but troublesome stake in the Russian affiliate TNK-BP for about $26 billion in a deal that completed this year.
"I think it has stabilized," said Peter Hutton, an analyst at RBC Capital Markets in London of the company.
After taking a largely conciliatory approach as it tried to resolve the Gulf spill dispute, BP is now aggressively defending itself in the courts against the federal government, the Gulf states and private claims seekers. To spread its message, it continues a robust advertising campaign promoting its commitment to the Gulf region and its investments in the United States. In a recent advertisement placed in national newspapers, the company noted that it had already spent $14 billion on the spill response and cleanup and paid out 300,000 claims totaling more than $11 billion.
In an effort to hold down Clean Water Act fines, the company plans to argue that far less oil spilled in the Gulf than the federal government claims. It has presented to the court a report that claims the federal government overestimated the amount of oil that leaked from the stricken well by 50 percent, potentially saving the company as much as $5 billion.
Barbier, the federal judge, has backed up Patrick Juneau, the administrator, on his enforcement of claims, but in a decision hailed by BP he recently appointed the former FBI director, Louis Freeh, to investigate possible ethical violations by the administrator's staff after the disclosure that a staff lawyer was forced to resign, supposedly because of kickbacks.
Last month the company's lawyers sent a letter to lawyers representing business clients who have already received awards, putting them on notice that BP is reserving the right to recover "excessive" payments should the company prevail in the New Orleans appeals court.
"You may wish to advise your client," the letter said, "to consider the effect of such potential obligations for budgeting and planning purposes."
The plaintiffs' lawyers charge that the letter misstates the law and violates BP's obligations under the settlement agreement.
By CLIFFORD KRAUSS and STANLEY REED
The New York Times